HOUSEHOLD BALANCE SHEETS AND THE RECOVERY
by ilene - September 10th, 2010 4:55 pm
HOUSEHOLD BALANCE SHEETS AND THE RECOVERY
Courtesy of The Pragmatic Capitalist
Pedro Amaral of the Cleveland Fed wrote an excellent piece in today’s “Economic Trends” on the state of the recovery and the cause of the slower than normal recovery. His conclusions are exactly in-line with my own: we are in a balance sheet recession that is largely caused by the implosion of the household balance sheet:
“The chart below shows the behavior of households’ (and nonprofit organizations’) net worth in the last six recessions. It is apparent that in the last two the damage to households’ balance sheets was both deeper with and more protracted than in the previous episodes. What was behind the drop in the latest recession? During this period, liabilities were roughly constant, so the drop happened because of declines in asset values caused by the real-estate collapse and the subsequent depreciation in financial assets. In the 2000 recession the drop was due to the stock market collapse. In contrast, in the twin recessions of the early 1980s, net worth never decreased, and in the early 1990s it dropped only about 2 percent.”
“The drops in household net worth help explain the protracted recoveries after the last two recessions. Personal consumption expenditures are the single biggest component of GDP at around 70 percent. If there is to be a solid recovery, consumption needs to increase at a substantially higher rate than the 1.7 percent it has averaged over the last year. But households are not going to start consuming at substantially higher rates until they have fixed their balance sheet problems. This is why the savings rate has been so high lately: Households are working hard at improving their wealth to income ratios at the expense of consumption. In previous recessions, since net worth did not fall by a substantial amount, this was not a problem. As incomes started growing again, consumption followed suit. Right now, an important part of that income growth is being channeled to savings. As the chart above illustrates, net worth is still well below prerecession levels and, barring an increase in asset prices (real-estate prices or stock market prices), the only way to increase it is by saving more and consuming less, further delaying the recovery.”
His conclusion, clearly, is similar to my own. We will not see above trend growth until the consumer balance sheet is…
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THE LABOR MARKET NEVER RECOVERED
by ilene - September 6th, 2010 12:38 am
THE LABOR MARKET NEVER RECOVERED
Courtesy of The Pragmatic Capitalist
Chatter of a “recovery” is back on the table after the markets schizophrenic actions in recent days. It’s amazing how quickly sentiment can change from tremendously bearish to tremendously bullish. Interesting lot us human beings are….Highlighted in this “recovery” talk was the “better than expected” jobs data. Jobless claims were “better than expected”, ISM manufacturing employment data hit news highs (although services, which is a MUCH larger portion of the economy declined) and the non-farm payrolls report capped off the week with a “better than expected” report. But if we take a step back here and look at the big picture you’ll actually notice that there has been ZERO recovery in the labor
Source: Center on Budget and Policy Priorities
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Initial Jobless Claims Jump while Philly Fed Signals Economic Contraction
by ilene - August 19th, 2010 6:54 pm
Initial Jobless Claims Jump while Philly Fed Signals Economic Contraction
Courtesy of Rom Badilla, at Bondsquawk.com
The Philadelphia Federal Reserve released its manufacturing survey for August, which suggests economic contraction and may lead the Federal Reserve to promote additional stimulus measures. The Philadelphia Federal Reserve Outlook survey or simply “Philly Fed” for August plummets to a negative reading of 7.7 versus economists’ surveys of +7.0. This marks the third consecutive decline after the outlook survey peaked in May at 21.40.
Behind the headlines, components that represent economic growth were especially weak. Specifically, New Orders dropped further into negative territory to -7.1 from a prior month’s reading of -4.3. Inventories fell from +4.5 in July to -11.6 while the Number of Employees component dropped from 4.0 to an August reading of -2.7.
Inflation expectations should remain subdued and keep bond yields in check as price pressures fall, judging by some of the Philly Fed components. Prices Paid dropped from +13.1 in July to +11.8. In addition, the Prices Received component continues to drive deeper into negative territory. The Prices Received component fell to -12.5 following prints of -6.5 and -8.4 in June and July, respectively.
The Philadelphia Fed numbers carry significant weight since the index is heavily correlated to the ISM manufacturing index and the index of industrial production, which both measure the health of U.S. economic activity. ISM Manufacturing should it fall below 50 in the coming months may lead the Federal Reserve to act in providing stimulus measures via Quantitative Easing.
The number of people in the U.S. filing for employment benefits increased last week according to the Department of Labor. Initial Jobless Claims for the week ending August 14 jumped to 500k people. The number of people who recently became unemployed and are now accessing government benefits was revised upward in the previous week by four thousand to 488k. The increase, which the highest reading since November of 2009, highlights the beginning of deterioration of the employment landscape in the last few weeks as economists were expecting a reading of 478k. Furthermore, the 4-week moving average, which is used to smooth out volatility to establish a better reading of trends, continues to inch higher to 482,500 people and is on the higher end of the recent range of 450-500k that has been established since last November. With this in mind, the number is…
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About that recovery you ordered
by ilene - July 31st, 2010 4:01 pm
About that recovery you ordered
Courtesy of James D. Hamilton at Econbrowser
"We have met the enemy and he is us," Pogo used to say. Well, we’ve also now met the recovery, and he is ugly.
The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 2.4% during the second quarter. The latest GDP numbers bring our Econbrowser Recession Indicator Index for 2010:Q1 down to 5.4%. This index is based on a very simple pattern-recognition algorithm for characterizing economic recessions. It is not a prediction of where the economy is headed, but rather a backward-looking assessment of where the economy stood as of the first quarter, using today’s 2010:Q2 data release to help inform that assessment.
University of Oregon Professor Jeremy Piger maintains a related index which has been at or below 1% for each month so far of 2010, while the most recent value calculated by U.C. Riverside Professor Marcelle Chauvet‘s algorithm is 7.8%. All three approaches agree that the economy remains in a growth phase that began in the third quarter of last year. A subsequent economic downturn would be described as the beginning of a new recession rather than a continuation of the previous recession.
*The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date, with 2010:Q1 the last date shown on the graph. Shaded regions (with the exception of 2007:Q4-2009:Q2) represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date. The most recent recession is shown on the graph as ending in 2009:Q2 as implied by the index; as of this writing the NBER has not yet assigned an end date for this recession.
But a pretty recovery it’s not. The economy has grown by 3.2% in real terms over the last year, about the average annual historical growth rate since World War II. But since recessions are characterized by below-average growth, expansions should typically exhibit above-average growth, and particularly in the first year of an expansion we often see very strong growth as a result of the positive contribution…
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Some Thoughts on Deflation
by ilene - July 24th, 2010 5:13 pm
Some Thoughts on Deflation
Courtesy of John Mauldin at Thoughts from the Frontline
Some Thoughts on Deflation
The Super-Trend Puzzle
The Elements of Deflation
Maine, New York, Turks and Caicos, and Europe
The debate over whether we are in for inflation or deflation was alive and well at the Agora Symposium in Vancouver this this week. It seems that not everyone is ready to join the deflation-first, then-inflation camp I am currently resident in. So in this week’s letter we look at some of the causes of deflation, the elements of deflation, if you will, and see if they are in ascendancy. For equity investors, this is an important question because, historically, periods of deflation have not been kind to stock markets. Let’s come at this week’s letter from the side, and see if we can sneak up on some answers.
Even on the road (and maybe especially on the road, as I get more free time on airplanes) I keep up with my rather large reading habit. This week, the theme in various publications was the lack of available credit for small businesses, with plenty of anecdotal evidence. This goes along with the surveys by the National Federation of Independent Businesses, which continue to show a difficult credit market.
Businesses are being forced to scramble for needed investments, generally having to make do with cash flow and working out of profits. This is an interesting quandary for government policy makers, as 75% of the "rich" that will see the Bush tax cuts go away are small businesses.
There was a great graphic (that I now cannot find) showing that all net new jobs of the past two decades have come from small businesses and start-ups. And yet as of now, when structural employment is over 10% (if you count those who were considered to be in the work force just a few months ago), we want to reduce the availability of revenues to the very people we want to be hiring new workers, and who are cash-starved as it is.
It is not just that taxes will go from 35% to just under 40%. It is the increase in Medicare taxes coming down the pike, too. We are taking money from private hands, where it has the potential…
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The Dismal Science Really Is
by ilene - July 3rd, 2010 2:10 pm
The Dismal Science Really Is
Courtesy of John Mauldin at Thoughts from the Frontline
Some Really Dismal Numbers
Unemployment Went Down?
Earnings Take a Hit
Money Supply Concerns
A Central Banker’s Nightmare
Why Don’t You Reform Yourselves?
There’s a reason economics is called the dismal science, and weeks like this just give it further meaning. In economics, there is what you see and what you don’t. This week we are going to examine the headline data we all see and then take a look for what most observers do not see. Then we’ll try to think about what it all really means. With employment, housing, and the ISM numbers, there is a lot to cover. And this letter will print out longer than usual, as there are a lot of charts. Warning: remove sharp objects from the vicinity and pour yourself your favorite adult beverage. This does not make for fun reading.
Some Really Dismal Numbers
The unemployment numbers this morning were just bad, even though the spin doctors were out in force. Of course we knew that because of census workers being laid off the number would be negative, and it was, down 125,000. But the "bright spot" we were told about was that private payrolls came in at 83,000 new jobs. Let’s look at what you did not see or hear.
First, last month’s dismal (there’s that word again) private job-creation number was revised down from 41,000 to 33,000. So in two months, total private job creation is 116,000 jobs. We need 125,000 jobs per month just to keep up with population growth.
But it is worse than that. The headline number we look at is from the Establishment Survey. That means they call up existing businesses they know about and ask them how many people are working for them, etc. One of the first things I do when the employment numbers come out is look at the birth/death assessment on the BLS (Bureau of Labor Statistics) web site.
For new readers, the birth/death assessment has nothing to do with people dying, but rather is the BLS’s attempt to estimate the number of new businesses that have been created or have "died" within the last month, and they use these numbers to adjust the employment total. They use historical, seasonal numbers to create a model from which they make these estimates. There is nothing conspiratorial about the…
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The mindset will not change; a depressionary relapse may be coming
by ilene - March 10th, 2010 10:49 pm
The mindset will not change; a depressionary relapse may be coming
Courtesy of Edward Harrison at Credit Writedowns
When former Morgan Stanley chief Asian economist Andy Xie comments on the United States, he focuses on a bailout nation keen on perpetuating a bubble economy predicated on malinvestment and overconsumption. In this he sees parallels with Japan and its long malaise.
Japan has experienced two decades of economic stagnation since the collapse of the infamous bubble it suffered in the 1980s. The most popular explanations are that Tokyo wasn’t aggressive enough in stimulating the economy after the bubble burst, or that it withdrew its stimulus too early – or both. This line of thinking is popular among elite economists in the US, where it is rarely challenged. But few Japanese analysts buy it…
The argument to "stimulate until prosperity returns" is popular because it doesn’t hurt anyone in the short term. When a central bank prints money, its nasty consequence — inflation — takes time to show up. When a government spends borrowed money, repayment is in the future. Nobody feels the pain now. Indeed, when debt is sufficiently long-dated, nobody alive need feel the pain. So analysts who advocate stimulus are popular with politicians because it sounds like a free lunch. Japan’s tale is just a nice story that seems to support the argument…
Japan has run up the national debt equal to 200% of GDP — the greatest Keynesian stimulus program in history — all in the name of stimulating the economy back to health. It has failed miserably. Japan’s nominal GDP is about the same as when the stimulus began. Those who advocated the policy blame Japan’s failure on either the stimulus being too small or not being sustained for long enough – that is, the dosage, not the medicine itself, was at fault.
The bankruptcy of Japan Airlines is a sobering reminder of what is still wrong with Japan. It stayed with unprofitable routes for years without its creditors or shareholders being able to do anything about it. And by making credit cheap and easy, the stimulus prolonged the airline’s business model — actually,
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Is Gold Getting Bubbly?
by ilene - March 10th, 2010 1:01 pm
Yesterday I posted an article by RICK BOOKSTABER, The Gold Bubble, in the Favorites. Having no opinion on the short or long term movement in the price of gold, I thought Rick’s article was thought-provoking, as he reasonably questioned the mass and loudish flow of money into gold investments.
Zero Hedge also posted the article, with a more critical introduction. I then perused ZH’s comment section to find a lot of animosity towards Rick’s opinion, even directed at his character (he works for the SEC!). The highly emotional tone surprised me, indicating a core belief was being challenged, as opposed to the fun and discovery of an intellectual debate. (Maybe this is typical in comment sections.)
Anyway, in this article, Nico Isaac also questions the faith many people have placed in GOLD as the next safety net against the ruin of our financial system.
For more on gold from EWI, download Robert Prechter’s FREE 40-Page Gold and Silver eBook. - Ilene
Gold: Best Supporting Role In Economic Downturns? Think Again
Gold’s safe-haven status is based on hype, not history
Courtesy of EWI, by Nico Isaac
As I sat down to watch the Oscar pre-show on Sunday night, March 7, one word was repeatedly used to describe the celebrity starlets and their designer duds: GOLD. Gold bustiers and gold lame skirts, shiny gun-metal dresses and glittery sequined gowns all basking in the golden shadow of the final golden statue.
Everywhere you look, from the Red Carpet to Wall Street, gold is definitely in "fashion." As for why, one word comes to mind: safe-haven. See, according to the mainstream financial experts, the more unstable the global economy, the greater the appeal for the precious metal.
And, with a staggering 17% unemployment rate in the United States, alongside slumping real estate sales, Eurozone weakness, the Greece debt debacle, and so on — the only thing going up is gold’s supposed disaster premium. Here, take these recent news items for example:
- "Bullion Sales Hit Record In Stampede To Safety." (Financial Times)
- "Gold Ticks Higher On Safe Haven Buying. The risk trade is resuming." (AP)
- "Gold Rose to 6 ½ Week Highs as the metal benefits from fears over financial instability in general. The market is looking for some security with gold." (Reuters)
- "Gold Rush: This is a new round of safe haven buying." (Bloomberg)
There’s just one problem: The correlation between a falling…
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Why Our Economy Is Utterly Screwed
by ilene - September 2nd, 2009 8:49 pm
Why Our Economy Is Utterly Screwed
Courtesy of Karl Denninger at The Market Ticker
Steve Liesman once again stunned me with his lack of understanding of matters economic today, when he commented that "in all recessions since 1970 at least the original part of it (recovery) has been jobless."
Yes, Steve, but why is any of this a surprise? What part of this graph isn’t instantly obvious to anyone with more than two firing neurons in their head?
That’s credit and population growth normed to a base of 1970. Population went from roughly 205 million to roughly 304 million during that time, a 50% increase.
Outstanding consumer credit went from $128 billion to $2,525 billion, or a 1,973% increase – and this is only consumer credit, ignoring mortgages, financial firm credit, business credit, commercial real estate and of course government debt!
Why are we not seeing "robust" economic growth when we exit recessions? Why is there no real hiring going on? Why can we not have a robust economic recovery? Why are we are replacing good jobs with "McJobs" that pay half as much – or less? And more importantly, where did all the "so-called prosperity" really come from, especially from 1994 on?
In each and every instance of recession from 1970 onward we have "pulled forward" more and more demand and created fake "prosperity" through the creation of ever more debt that we have goaded consumers to take on. By doing so we have crippled the ability of the economy to grow, redirecting as much money as possible to a handful of people and firms (commonly known as "banks" and other "financial companies") instead of directing that effort and money into productive enterprises such as building cars, television sets and similar items.
THIS time though the recession didn’t come from "ordinary business conditions"; it instead happened because the credit carrying capacity among both consumers and businesses hit the wall – they could no longer make the debt service payments and started to default.
It began with "subprime" mortgages but that was nothing other than the first "hiss" of trouble out of the pressure vessel as the structural integrity of the fraud-laced credit system, where "capacity to pay" became a bad joke, had begun to disintegrate.
We pushed the envelope of fraudulent credit creation and the sale of fraudulently-underwritten debt too far – and it blew up in our collective
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DEEP THOUGHTS FROM RICHARD RUSSELL
by ilene - July 10th, 2009 3:58 pm
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DEEP THOUGHTS FROM RICHARD RUSSELL
Courtesy of The Pragmatic Capitalist
Regular readers know that I am a huge fan of Richard Russell’s work. For those who aren’t familiar with Russell, he is the author of The Dow Theory letters. Obviously, he is a student of Dow Theory (perhaps professor is more appropriate). Most importantly though Russell is about as experienced an investor as you’ll find on the planet. He has lived through cycles that no one else can even remember.
I like to think that the market works on a different clock from the rest of the world. Economic cycles are often long and drawn out. It can be hard for humans to comprehend economic cycles because the length of an economic cycle is not based in years or months. It can literally work on its own clock. The current deleveraging cycle is particularly frustrating for investors because these types of recessions tend to be long and drawn out unlike your average 8-16 month recession. A full economic cycle can be anywhere from 5 years to 25 years from peak to trough. Humans, particularly investors, have trouble seeing past the next 5 to 25 minutes. It’s safe to say that Mr. Russell has seen more cycles than anyone and his educational and priceless commentary is evidence of this. I’ve included some of his notes from this latest week and highly recommend his newsletter. His ability to grasp the big picture is truly unmatched:
Question — Russell, you seem to think this is going to be a world-class bear market. Why do you think that?
Answer — The US and its people have been borrowing and leveraging for decades or ever since WW II. There’s never been a true correction in the economy, although there have been corrections in the stock market (1973-74 and 1957-58). Consumer buying makes up 70% of the Gross National Product of the US. For the first time in decades, US consumers are dealing with massive unemployment. This is scaring them and causing them to cut back in their buying and now they are actually saving. Fear is the strongest of all human emotions, and US consumers are finally dealing with naked fear. I believe this fear will bring on years of saving and a long period
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site